Thomas R. Saving

The Economics of Quality

This paper develops a model of quality determination where the usual competitive equilibrium conditions hold. The explicit form of quality considered is the wait required to obtain the product. The analysis, however, is much more general, being valid for products that have a characteristic, z, such that (1) demand is a function of price and a measure defined on z, (2) costs are a function of output and the measure on z, and (3) z is a function of output and capacity. Expected profit-maximizing firms, in equilibrium, look like monopolistic competitors. Once constant quality is imposed, however, the perfect competitive results obtain.

Estimation of Optimum Size of Plant by the Survivor Technique

I. The nature of optimum size, 569. — II. Problems in estimating optimum size, 570. — III. Previous techniques for the estimation of optimum size, 572. — IV. The survivor technique, 572. — V. Applying the technique, 574. — VI. An investigation of the relationship between optimum plant size and various economic variables, 582. — VII. Summary and conclusions, 596. — Appendix I. Optimum size in 89 American manufacturing industries, 598. — Appendix II. Four possible movements in the distribution of plants, 603. — Appendix III. Measurement of the independent variables, 605.

COMPETITION AND HIGHWAY PRICING FOR STOCHASTIC TRAFFIC

This paper models the competitive supply and pricing of highways with random traffic. It adds the missing theory, of the firm to Knights highway problem and shows that competition delivers efficient prices. The classic efficient-pricing results of Knight and Walters are shown to be valid in a world with uncertain traffic flows. Competitive prices exceed marginal cost by an amount equal to expected marginal congestion cost. The mean throughput of each highway firm is less than maximum throughput. Even though the expectation of excess capacity is positive, random traffic jams will occur on an efficiently priced highway. Pricing of mixed traffic is also analyzed. (Authors)

Transactions Costs and the Demand for Money

PREVIOUS EFFORTS TO EXPLAIN ie demand for money by the firm have treated the problem as one of inventory theory. For example, the classic paper by Baumol [1] derives the demandformoneyfor thecertainty case by utilizing fixed timing of cash inflow and outflow and assuming that the firm wants to minimize the resulting holding costs. In this approach it is assumed that going in and out of money, i.e., either out of or into bonds, has a fixed transactions cost. The Baumol approach has since been extended by Tobin [S] to include a slightly more complex cost function and by Miller and Orr [3] to account for specific forms of uncertainty.l In all of the above approaches the timing of cash inflows and disbursements is treated as a parameter (in the Miller and Orr case it is the probability distribution of changes in the cash balance that is treated as a parameter). As a result the cash balances generated by the transactions are treated strictly as a necessary burden of doing business. The natural question is then: given the opportunities of the firm to lift this burden, what is optimal average cash balance? Thus, any productivity of money is neglected entirely. That is not to say that the results pre-vrously generated are wrong or unimportant (they are neither of these), but simply that they are incomplete treatments of the demand for money. In the following I treat the firm as a profit maximizer arld derive the demarld for

Market Organization and Product Quality

The modern discussion of the impact of market organization on product quality had its beginnings in the work of Levhari and Srinivasan [7] and Schmalensee [8]. Both of these works argued that a monopolistic market resulted, in equilibrium, in a product with lower quality (in their case, lower durability) than a similar industry competitively organized. It was later pointed out by Swan [10] that both Levhari and Srinivasan, and Schmalensee, had neglected to appropriately account for the opportunity cost of holding the stock of the durable good required to produce the long-run equilibrium level of service flow. Once this cost was accounted for, both forms of market organization produced goods of equal quality (once again, equal durability). That is not to say that monopoly is efficient in the economic sense but only that the inefficiency of monopoly lies not in the quality of product it produces but in the quantity of output.

Life-Cycle Job Choice and the Demand and Supply of Entry Level Jobs: Some Evidence from the Air Force

T HE theory of occupational choice has largely left the choice of job and duration of employment in jobs unexplained. If agents plan a length of stay on the job when they are employed, then turnover is determined when a new hire is made. In the steady state, new hires replace losses from the employment pool, and hence the demand for new employees reflects the supply of employment duration as well as demand behavior. The employers demand for a stock of employees and the supplied duration of employment determine the flow demand for new hires. If flow supply and demand are in equilibrium, the supply of workers and their planned duration of employment must support equality of replacements and losses. An adequate theory of the labor market must explain these stock/flow relations and provide some basis for separating demand and supply behavior. In this paper we develop a model of this process and estimate the model for the U.S. Air Force enlisted personnel market. We begin with a simple theory of the life-cycle job choice problem. This theory posits job sequences as the objects of choice and the optimal sequence determines the type of job chosen at each point in the life cycle as well as the duration of employment in each job. This simple theory of life-cycle supply is integrated into an inventory model of employment demand to achieve an equilibrium model. The model is extended to consider the complications introduced by stochastic supply behavior and quality rationing by the employer. The sources of bias in supply elasticity estimates of conventional labor supply models are identified and discussed. Finally, the model is estimated using data on Air Force enlisted personnel.

Money Supply Theory with Competitively Determined Deposit Rates and Activity Charges

WITH THE INCREASED USE OF NOW accounts and the attempts by the S&Ls to make passbook accounts checkable, it is simply a matter of time until the prohibition against interest payments on demand deposits will be removed. Once explicit interest is allowed, the current devices to circumvent ie prohibition, such as free checks and activity charges at below marginal cost, should disappear. The effect of these changes in the institutional structure of the monetary system on the money supply process is the subject of this paper. In an earlier work [6] I developed a money supply model in which I incorporated the banking industry as profit-maximizing firms. I assumed iat the prohibition against interest payments was completely circumvented by the banks in a way that resulted in zero activity charges plus a positive deposit rate. This approach is inappropriate here, since the interest payments will now be explicit so that the device of reducing activity charges is neither necessary nor optimal . In spite of my previous assertions to the contrary [6, p. 293, fn. 10] neglecting ie market determination of deposit rates does significantly affect the results of a market-determined supply process. In fact, allowing for the market determination of both deposit rates and activit charges removes the ambiguity concerning ie effect of interest rate changes and introduces ambiguity in ie effect of income and weali changes. In the usual portfolio approach to money supply determination [1, 3, 4, 5], increases in market interest rates increase ie money supply because of reductions in desired reserve holdings. In this work increases in interest rates increase ie money

Government revenue from money creation with government and private money

Abstract For a stationary state, we show that if the government is as efficient as a competitive banking industry in producing money, then the substitution of private for government money does not alter the revenue from money creation or the present value maximizing holding cost of money. If households and non-banking firms hold both government and private money, then maximum present value requires that the reserve ratio maximize the monetary base and that the base nominal interest elasticity equal minus one. With perfect foresight, zero money balances and zero revenue from money creation is the only time consistent revenue maximizing solution.

A Generalized Approach to Multigeneration Project Evaluation

In this article, we generalize the existing descriptive approach to multigeneration public project evaluation, taking into account distortionary taxes on capital income. In contrast to conventional wisdom, we show that such generalization does not require a project-specific social discount rate (SDR) expressed as a weighted average of gross and net rates of return. What emerges is the concept of the marginal cost of public funds (MCF) that has the convenient property of project independence. In addition, the MCF-based criterion identifies projects that, along with appropriate intergenerational transfers through time-varying head taxes, are Pareto improving, and is, therefore, independent of any utilitarian social welfare function being used.

On the Neutrality of Money

The neutrality of changes in the monetary base and reserve requirements is examined assuming the existence of two forms of money and an arbitrary number of other financial assets. Necessary and sufficient conditions for a policy to be neutral are developed. Several forms of institutional structure for the banking system are examined to see whether these structures satisfy the derived necessary conditions. It is shown that reserve requirement changes are neutral under very restrictive conditions. Moreover, even the neutrality of monetary base changes requires that money maintenance cost functions be homogeneous of degree zero in nominal money and prices.